What is a stipend & how does it work?

If you want to attract and retain top talent for your business, stipends could be a smart addition to your compensation strategy, offering a flexible way to support your team. This unique financial assistance goes beyond typical paychecks to cover needs like living expenses, ongoing education, and remote work setups. 

Below, we’ll explain what a stipend is, including its uses, eligibility, and differences from a salary. 

What is a stipend?

A stipend is a fixed sum of money that is part of a company’s overall employee compensation package. Team members may receive a stipend to cover job-related expenses either in addition to or instead of a salary.

Whereas a salary financially compensates workers for their labor, a stipend is meant to offset certain costs. These costs may include living expenses, training, work equipment, and more—any expense related to the job. Interns, trainees, students, and clergy often receive this type of financial assistance, which helps workers focus on their professional development without having to worry about the cost.  

How do stipends work?

Stipends make up part or all of an employee’s total compensation but follow different rules from traditional wages. Here’s how stipends function:

Stipend uses

Stipends may cover housing, meals, professional development, travel, and other work-related expenses. Some employers also offer stipends for health insurance, gym memberships, and equipment (e.g., laptops). These funds help team members manage their daily needs so they can devote more time and focus to their work. 

Stipend qualifications

Stipend eligibility depends on the business and role. Many companies award stipends to trainees, apprentices, and interns—employees who are just starting out and may need a helping hand.

Stipends often help workers pursue opportunities they’re passionate about. For example, a nonprofit organization might offer a stipend to paid interns working on a community project, allowing them to contribute to a cause they care about without worrying about expenses like rent and groceries. 

Stipend regulations

Stipends often carry specific guidelines, ensuring the financial aid serves its intended purpose. For example, an educational stipend may stipulate that the recipient spends it on educational materials, textbooks, and university tuition. In some cases, a stipend might only be available for unpaid internships. 

Stipend amounts

Stipend amounts can vary widely. In the United States, these sums don’t have to adhere to minimum wage requirements, and the Department of Labor doesn’t limit stipends, so businesses can tailor the amount to the recipient’s needs. A monthly stipend can be a small amount, like $500 to cover college textbooks, or a more significant amount, like $1,500 to support continuing education courses. 

Types of stipends

Stipends offer a flexible way to provide employees with extra support beyond financial compensation. For example, a tech startup might offer a “creativity stipend” to encourage employees to attend art or creative writing classes, or a dating app might offer a “date stipend” for employees to take their partners on fun outings. Here are some of the most common types of stipends:

• Work from home: A remote work stipend covers expenses like office chairs, supplies, electronic devices, and home internet plans to help employees work from home.
• Academic research: This stipend supports students and researchers and contributes to study-related costs like tuition, books, or specialized equipment. 
• Health insurance: A health insurance stipend offsets the cost of health insurance premiums so employees can afford healthcare. This stipend is valuable for employers that don’t offer health insurance as part of their employee benefits.
• Job training: Job training and development stipends bolster your staff’s professional growth and encourage employees to acquire new skills.
• Internship: Internship stipends help cover interns’ living expenses, travel, and work equipment. Stipends that cover living expenses like housing are also called living stipends.

Are stipends taxable?

When you give employees stipends, you must understand how the stipends are classified to ensure compliance and avoid unexpected liabilities.

According to IRS stipend rules, most stipends are taxable income, meaning recipients must report them as income and pay the applicable taxes. Taxes typically aren’t withheld from stipends, so recipients must set money aside to pay these taxes.

A recipient may not have to pay income tax on a stipend if it’s exclusively earmarked for educational expenses.

An employer can cover certain other expenses for an employee without incurring income tax by providing them as fringe benefits. Often, the employer must either reimburse the employee or provide the goods or services directly. This differs from a stipend, which gives the employee money upfront. Tax-exempt fringe benefits include:

• Work phones
• Retirement planning services
• Commuting costs
• On-premises meals/lodging
• Employee discounts

Some of these benefits are subject to caps beyond which they become taxable income. Some are exempt from income tax withholding but not Social Security, Medicare, and federal unemployment taxes.

What’s the difference between stipends and salaries?

A salary is fixed, regular compensation for work. This payment—typically made weekly, biweekly, or monthly—is tied to the employee’s job responsibilities. Salaries often include an employee benefits package and are normally paid to full-time employees. Part-time employees usually earn an hourly wage instead of a salary. 

Stipend payments are fixed amounts employees receive to support specific needs in addition to their regular salary—in other words, they aren’t tied to job responsibilities or hours worked. 

Other additions to your compensation strategy

Stipends aren’t the only way you can reward workers and attract top talent. Here are some other types of compensation to consider:

Stock grants

A stock grant is an award of company shares. It encourages team members to stay in their roles and support the company’s growth. When a company provides stock grants to staff, it demonstrates an investment in its workforce and their shared future together. Startups frequently give out stock grants.

Incentive-based compensation

Incentive-based compensation rewards employees for achieving specific performance goals. This type of pay varies and can include bonuses and stocks. It can also be any other financial rewards linked to individual, team, or company performance. Incentive-based compensation is also called incentive pay and is separate from the employee’s guaranteed salary or hourly rate.

Bonuses and commissions

Bonuses and commissions are two types of financial incentives for employees. Bonuses are typically one-time payments used as rewards for achieving specific work-related goals, whereas commissions are earnings based on the sales an employee generates. Bonuses are often given at employer discretion, but commissions are directly linked to employee performance.

13th-month salary

A 13th-month salary is an additional month's pay that employees typically receive at the end of the year. Common in some countries, this extra sum rewards employees for their hard work and dedication. In some cases, it’s given as a Christmas or holiday bonus.

Elevate your compensation strategy with Oyster

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